Aug 1, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • SmileDirectClub is aiming for a $1 billion IPO in September. (CNBC)
  • The London Stock Exchange said it will buy Refinitiv, formerly Thomson Reuters, in a $27 billion deal. (Reuters)
  • The US will get data on initial jobless claims, construction spending and 2 readings on manufacturing this morning. (MarketWatch)
  • The Bank of England held rates steady but lowered its growth forecast for the U.K. as the British pound fell below $1.21. (The Guardian)
1 big thing: America's economic inflection point

Illustration: Lazaro Gamio/Axios

It's President Trump's move now.

  • Trump got the rate cut he's been asking for since March, but Fed chair Jerome Powell stopped just short of giving him and the market everything they wanted at the Fed's policy meeting Wednesday.

Why it matters: Powell's cut is the central bank's latest effort to address the U.S. economy's current bipolar state: While consumers are confident and continue to spend, the significant pullback in the manufacturing and transportation sectors show that businesses are not.

On one side: Tuesday's rock-solid U.S. consumer confidence reading was the latest sign that Americans feel good.

  • Commerce Department data Friday showed consumer spending, which makes up the lion's share of the U.S. economy, increased 4.3% in the second quarter, while government spending rose 5%, the biggest boost in a decade.

On the other side: Those numbers fly in the face of data on business investment that shows firms dramatically slowing down spending and delaying big projects because of the uncertainty caused by the trade war.

  • Nonresidential investment fell 0.6% in Q2, the first drop since 2015, and residential investment decreased for a sixth straight period.
  • Readings on the U.S. manufacturing sector have fallen for 6 straight months — nearing an outright contraction — and the freight industry also has been slowing for the better part of the year.

The big picture: "Something has got to change," Mark Zandi, chief economist at Moody's Analytics, tells Axios. "Either consumers hold tough and cheer up businesses and they resume investing again. or businesses lose faith and cause consumers to pack it in, and we go into recession."

  • Which way the economy goes depends on Trump, Zandi says. While he continued to heckle the Fed on Twitter Wednesday after the rate-cut decision, it's Trump's tariffs and trade war with China that will determine whether the economy gets back on track or not.

Where it stands: As Powell mentioned during his press conference, the current cease-fire in the trade war has settled business owners somewhat, but further aggression will likely see more companies in the trade sector and other parts of the economy start to show negative effects.

  • "Confidence is all about the labor market right now and, somewhat paradoxically, because companies are not investing in capital goods, that might be creating more demand for labor," Tendayi Kapfidze, chief economist at LendingTree, told Axios. "Is it sustainable? I think the longer we go without a resolution to this trade issue, things start to get more vulnerable."
2. Powell's rate cut could send the dollar "significantly higher"
Expand chart
Data: Investing.com; Chart: Axios Visuals

The dollar rose to its highest level in more than 2 years after the Fed's rate cut Wednesday, as currency markets got a reality check about the growth prospects of the greenback against the world's other currencies.

What's happening: Strategists have been expecting the dollar to weaken for the past 2 years, yet it has remained strong against global peers like the euro, pound and yuan. After Powell's Wednesday press conference, the dollar looks poised to rise to new highs.

Why it matters: President Trump has openly complained about the strong dollar's negative impact on U.S. businesses that generate significant revenue overseas — many of which are also suffering from the trade war. Continued appreciation now seems likely and could prompt action from the White House.

What they're saying: John Doyle, vice president of dealing and trading at Tempus Inc., tells Axios that Wednesday's news conference marks a "recalibration" for investors in the currency markets.

  • If Powell and the Fed stand by the "mid-cycle adjustment" language used during Powell's press conference, the dollar could test its highs from March 2017.

Investors had been factoring in multiple rate cuts from the Fed in the next 12 months, but Powell reset expectations about the direction of U.S. monetary policy versus the rest of the world, Joe Manimbo, senior market analyst at Western Union Business Solutions, tells Axios.

  • "Today’s hawkish rate cut poured cold water on expectations for a series of rate cuts for the balance of the year."
  • What happens next for the dollar will depend on what the other central banks bring to the table, Manimbo added. "If we see forceful action from the ECB in September, if the Bank of Canada joins the action, that could send the dollar flying significantly higher."
3. No wonder people are taking out loans to pay off credit cards
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Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The interest rate Americans are paying on credit cards has risen to an all-time high, pushing more people to personal loans.

The interest rate for personal loans can be more sensitive to market forces, notes Matt Carter at Credible. For the past 10 years, the interest rate on personal loans has declined, in line with overall U.S. interest rates, whereas the rate for credit cards has continued to rise.

4. Watch out for August

The last time stocks performed as well as they have so far this year was 1997, but historically as the market has boomed, August has brought significant slowdowns, analysts at LPL Financial warn.

By the numbers:

  • "The S&P 500 has been down an average of 0.78% in August over the past 10 years, worse than any other month," LPL senior market strategist Ryan Detrick said in a recent note.
  • The S&P 500 has fallen an average of 0.05% in August since 1950, with only September being worse.
  • "Since 1990, when the S&P 500 has been negative during the month of August, it was down 4.6% on average, again the worst out of any month."
  • "August 1990 is when Iraq invaded Kuwait; August 1997 had the Asian contagion; August 1998 had the Russian debt crisis and Long-Term Capital Management (LTCM) collapse; August 2011 gave us the U.S. debt downgrade; and August 2015 delivered the Chinese currency crisis," Detrick added.
Dion Rabouin